Here's The Real Reason The Head Of Yale's Endowment Is Bullish On PE

PE Hub (via Paul
Kedrosky) has an
interesting take on why the head of Yale's endowment is still
bullish on PE after losing tons of money investing in the asset
class.

Even though Yale's endowment was
mauled in 2008, largely because of their manager's, David
Swenson's, investments in private equity, recent news shows that
he has upped Yale's exposure to PE from 20% to 26%.

This is because, says PEHub, Swenson, wants to create wiggle-room
— and an aura of calm — when the PE exposure inevitably grows.

Let's take a look at Yale's Annual Endowment report:

Under the terms of certain limited partnership and limited
liability company agreements for private equity and real estate
investments, the University is obligated to remit additional
funding periodically as capital calls are exercised. At June
30, 2009, the University had uncalled commitments of
approximately $7.6 billion.

Yale’s entire endowment fund was worth $16.3 billion as of June
30. So Yale's investment in PE and real estate makes up almost
half of their whole endowment.

The University has various sources of internal liquidity at
its disposal, including cash, cash equivalents and marketable
debt and equity securities. If called upon at June 30, 2009,
management estimates that it could have liquidated approximately
$3.6 billion (unaudited) to meet short-term needs.

This means Yale committed a certain amount of money to PE funds
that it hasn't yet delivered to them (this is normal - similar
among all investors in PE funds). The PE fund can "call" this
money and then Yale is expected to make good on its promise. But
as of June 30, 2009, Yale wouldn't have been able to pay out even
half of its investment in PE.

So, PEHub suggests, Yale’s hope here is that private
equity distributions will outpace new capital calls.
(That they'll make money off their investments before they have
to deliver the funds.) Even more damaging, PEHub suggests:

The school felt its best hedge is to increase its target
allocation, in order to create wiggle-room — and an aura of calm
— when the PE exposure inevitably grows.